Convertible securities, typically a bond or a preferred stock, have faced an uphill battle in recent years, but the stage may be set for better times ahead, according to Fidelity’s Adam Kramer.
“The equity sensitivity of the convertibles market has shrunk to its lowest level in quite some time, leading to what we consider attractive investment opportunities,” highlights Kramer, who alongside Ford O’Neil co-manages Fidelity® Strategic Dividend & Income Fund (FSDIX).
In managing the fund, Kramer and O’Neil tactically allocate assets across several dividend- and income-paying categories, shifting the fund’s asset mix based on where they see opportunities in the marketplace at any given time.
“Valuations have now fallen to the point where most of the convertibles market is ‘busted,’ meaning the issuer’s underlying stock is trading well below its conversion price,” explains Kramer.
Consequently, he notes that when this takes place, convertibles end up behaving much more like bonds than stocks, due to the small odds of the securities reaching their conversion price.
Additionally, Kramer points out that that a lot of equity-sensitive, mandatorily convertible securities have left the fund’s benchmark and have not been replaced.
In the current environment, convertibles have significantly underperformed the technology-focused Nasdaq Composite Index®—which includes the stocks of many convertibles issuers—trading anywhere from 40 to 70 cents on the dollar, observes Kramer.
That said, he also reveals that market participants have figured out that many of these securities, despite being out of favor, are often issued by fundamentally sound businesses unlikely to go bankrupt.
“In fact, a number of issuers in the convertibles markets are innovative companies with healthy businesses that are generating strong cash flow while also cutting costs,” Kramer states.
He cites DraftKings and Unity Software as fund holdings on October 31 that are likely to have staying power and are at the forefront of transforming their respective markets.
Furthermore, he notes that these and other firms have seen value in their own convertibles and have chosen to buy the securities at a discount, which he views as a vote of confidence and meaningful support signal.
For specific fund information, including full holdings, please click on the fund trading symbol above.
Adam Kramer is a portfolio manager in the High Income and Alternatives division at Fidelity Investments.
In this role, he manages several multi-asset income funds: Fidelity and Advisor Convertible Securities Funds, Fidelity and Advisor Multi-Asset Income Funds, and Fidelity’s Strategic Fund lineup—Fidelity and Advisor Strategic Dividend & Income Funds, Fidelity and Advisor Strategic Real Return Funds, Fidelity and Advisor Strategic Income Funds, and Fidelity VIP Strategic Income Portfolio. Mr. Kramer also co-manages Fidelity Preferred Securities & Income ETF. In addition, he manages opportunistic high-yield bond strategies for institutional investors as well as a high-income fund available exclusively to Canadian investors.
Prior to assuming his current responsibilities, Mr. Kramer co-managed Fidelity Advisor Equity Income Fund. Additionally, he worked as a portfolio assistant on Fidelity Leveraged Company Stock Fund, Fidelity Convertible Securities Fund, and Fidelity Advisor High Income Advantage Fund. He began working full time at Fidelity in 2000 as a research analyst and has since covered a variety of industries.
Prior to joining Fidelity in 1999, Mr. Kramer worked for RSM Richter in Montreal as a chartered accountant and auditor. He has been in the financial industry since 1994.
Mr. Kramer earned his bachelor of commerce degree in accounting and a graduate diploma in public accountancy from McGill University. He also earned his master of business administration degree from Cornell University.